Asset Based Valuation - Example
K and K Company Limited is planning to absorb three other companies so as to realize its sales records of Sh.500, 000 per annum. Its accountants have advised the company to keep such a size which will enable its shares to sell at a minimum price about Sh.16. last published balance sheets of the company is shows as given:
Sh.'000'
Ordinary shares of Sh.10 each 50,000
Reserves 65,000
Current liabilities 40,000
Total 155,000
Assets: Sh.
Fixed assets 80,000
Current assets 75,000
Total 155,000
For the last 5 years profits were as follows:
Sh.'000'
1. 9,000
2. 6,000
3. 10,000
4. 8,000
5. 17,000
P/E ratio applicable is 12:1
Estimate the value of the business indicating the lowest offer price and the highest offer price and the share value thereof if it would be viable to take on the three companies if it's to maintain this share value.
P/E Ratio Method
P/E = 12:1 Average profits = 10,000,000
Therefore Value of business = 10,000,000 x 12
= Sh.120,000,000
Value of shares = Sh.120 million / 5 million shares
= Sh.24
Assets Method
Sh.'000'
Assets 155,000
Less: Current liabilities [40,000]
115,000
Value of shares = Sh.115M/5M shares
= Sh.23
Where like: Po = Price of ordinary shares
d = Dividend at the ending of year one
P1 = Price of the share at the ending of one year.